Cloud music services are not helping enough. Here's how they could, says independent music industry analyst and MIDEMBlog regular Mulligan

I started off 2011 by declaring that the digital music market was facing an impasse. It is tempting to think that we’re beginning to get out of that impasse with the launch of cloud services from the big three of Apple, Google and Amazon, and with Pandora’s successful IPO. By and large though, we are still pretty much where we were. The fundamental problems persist:

Consumer spending is not growing quickly enough due to a lack of compelling new services

Small margins are discouraging investment and new services, driving market consolidation

The economics of free don’t yet add up

We Are Not Ready For The Consumption EraAnyone who hasn’t been on Mars this last decade and a half knows that the music industry is undergoing a transformation of seismic proportions. Not everyone though grasps what that change actually is. Tumbling revenues, stuttering download sales and the pervasive threat of piracy are the symptoms, not the causes nor even the effect. They are symptoms of a paradigm shift from distribution-to-consumption, from selling little shiny discs towards on-demand models. This should be a manageable process with pain levels kept at a tolerable level. It is not because we don’t yet have a portfolio of killer consumption-era products that generate large enough incomes for rights holders and – crucially – at the same time that generate large enough profits for the services.

Digital Music Doesn’t Do Enough for Either Side of the Value ChainThat tension between rights holder income and service provider margins is creating fault lines right across the digital music value chain. Pandora – one of digital music’s true success stories – had a very successful introduction to the stock market yet remains unprofitable despite having a big – and growing – installed, highly engaged user base. Pandora complains that rights costs are too high, while label execs complain that Pandora doesn’t pay enough. Similar arguments persist around ad-supported on-demand services like We7 and Spotify, and now the new wave of locker services.

The problem is that both sides are right: cloud services are not generating enough income for rights holders and profit margins are small at best, often negative. Worse still, free and nearly-free services increase consumer perceptions that music should be free in the digital arena, and the increased sophistication of the (legal) free services raise consumer expectations, but not willingness to pay (see graphic).

Business Models and Products Must Be InnovatedSo how can the circle be squared without breaking the model entirely? The answer lies in pursuing two strategic imperatives:

1. Focus on subsidised, consumption-era products. On-demand services which feel-like-free to consumers but are paid for by third parties such as ISPs and car manufacturers who get a boost to their core products by bundling music with music. Think how small a fraction of the cost of a new cars’ price 2 years of Spotify Premium would be… There are plenty of companies trying to drive this approach (e.g. Beyond Oblivion, Omnifone, 24/7, Deezer and 7 Digital, even Spotify has given it a go). Now is the time to recognize that subsidised models are not an alternative approach, but the main thrust for the mass market consumer.

2. Build exciting new music products that don’t just repackage the analogue-era ones. But business model innovation alone isn’t enough. It will fix the financial tensions but consumers still need an exciting raft of new products and services that are designed for the consumption-era. 99 cent downloads are a digital sticking plaster for the CD business. 21st century music products must leverage ubiquitous connectivity, social tools, interactivity, multi-media and on-demand behaviour.

More people are listening to more music, across more devices than ever before. That is a fantastic foundation stone for future growth, but the challenge can only be met with consumption-era business and service innovation.

11 comment on this article

I think that time has shown us that trying to make money directly from the sale of music is a losing battle. As soon as Napster introduced millions and millions of users around the world to file sharing the amount of file sharing has gone up and up. Most in the music business deny that this is where we should be, but the past suggests differently. As the industry moved from one storage medium to the next (dictated mostly by consumers), each medium had a greater possibilty for replication by the consumers. So really, we’re exactly where we should be. Instead of fighting or denying this fact, we should be embracing it. For years the music industry did everything it could to promote it’s artists. Now they have the means to do so cheaper than ever and to more people than ever. Recorded music should be used to market artists and to sell tickets to performances and merchandise. If the industry would stop focusing on the loss of revenue sales from recorded music and took that focus and applied it to marketing things that still hold their monetary value to consumers, they would be in a lot better shape.

I agree wholeheartedly, innovate and compensate for what’s needed to sustain the industry and it’s new model. “Time keeps on ticking into the future” isn’t that what the song says? so must we in this industry.

“…free and nearly-free services increase consumer perceptions that music should be free in the digital arena, and the increased sophistication of the (legal) free services raise consumer expectations, but not willingness to pay…”

The consumer demands to be served, and when you do they will pay. The industry missed the digital boat at first then alienated the consumer with DRM. Apple then sailed in and showed that when you provide a service people want and enjoy using, they will pay. They will pay a premium, even when the option for free downloads remains.

There is now a generation who need to be won back by serving with something that excites them.

The revenue model set by Apple doesn’t work outside their eco system which is hardware based. This is no different to when Sony and Phillips owned the CD format and saw the music as just content. Labels needs to move a little to make it work, except the consumer – 99c is enough for a track.

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